Rental values close to floor

Nia Williams

August 19, 2010

The latest RICS Construction Survey suggested that activity across the sector as whole dipped in Q2, said Capital Economics. Encouragingly, however, the slump in public sector construction activity was not mirrored in the private commercial sector.

Commenting, Kelvin Davidson, property economist at capital economics, said: “After moving into positive territory in Q1 (for the first time in two years), the overall RICS construction sector activity balance was negative again in Q2, at -7%. In other words, it suggested that construction workloads fell.

“Given the new phase of fiscal tightening, it was no surprise that the public sector housing balance fell from +3% in Q1 to -26% in Q2 and that the “other” public works balance fell from zero to -33%.

“Slightly more encouragingly, private sector residential construction was broadly stable in Q2 and private commercial activity also held up. That balance relating to commercial construction was weaker than the message from recent CIPS/Markit PMIs, though not dramatically.

“More generally, the latest data on commercial development activity could be evidence that developers’ confidence in the near-term prospects for occupier demand has held up relatively well. If so, then our view that property rents will find a floor in the remaining months of the year seems on track.

“However, today’s data did arguably highlight some risks to that view. Although it may mostly reflect uncertainty about public sector demand across the construction sector as a whole, the balance for output expectations in a year’s time was negative in Q2, as was the balance relating to employment expectations.

“On balance, however, the latest RICS survey does not change our view that average commercial property rental values are now at, or very close to, a floor.

“In addition, subdued employment expectations suggest that developers do not anticipate a need for them materially to raise their output to match demand anytime soon.

“This suggests that any recovery in rents is also likely to be pretty slow.”

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